growing literature has attempted to measure the economic impulses from discretionary
fiscal policy using annual deficits as the key measure of fiscal impulses provided by
government policies (GaH and Perotti, 2003; Alesina and Perotti, 1995).
Fiscal policymakers and budget practitioners have an abiding interest in maintaining these
definitions and tools for exercising short-term operational control over government
budgets. Hence, if short-horizon fiscal measures prove inadequate for analyzing long-
term fiscal sustainability and structural reform issues, the simplest solution is to extend
the time horizon over which traditional deficits and debt are projected. One proposal is to
project and report government revenues, expenditures, and surpluses/deficits over the
next 50 or 75 years under alternative economic and demographic assumptions. These
measures can be calculated for both the general government as a whole and for
subprograms that are financed out of dedicated revenues—such as retirement and health
programs.
Accrual Accounting Measures
For most EU countries, future outlay increases on retirement and health benefits are
already built into fiscal systems, and they imply growing annual deficits. Hence, the
evaluation of a country’s fiscal stance should explicitly recognize those costs as
additional debt owed by the government. One way of doing so is to adopt accrual
accounting, which would include a summary measure of future payment obligations net
of assets accrued from past transactions - called “unfunded accrued obligations.” Accrual
accounting considers the government’s financial obligations and assets that have been
“earned” or “booked” based on events that have occurred through the current period
whether or not the funds associated with those events have been paid or received as yet.
In the context of government finances, there could be considerable uncertainty and
controversy about what constitutes an obligation-triggering event. A common example is
that of public pension programs that link benefits payable in the future to current or past
labour force participation, earnings, or tax payments. However, when social transfers
scheduled under today’s laws may be altered by changing those laws, it remains unclear
whether past employment, tax payments, or other such events are by themselves
sufficient to trigger future benefits and, therefore, whether those events justify inclusion
in “unfunded accrued obligations” on a par with contractual (deeded) debt owed by the
government.
This problem could be resolved by distinguishing the information provision role of
budget measures from the liability recognition function that is usually associated with
budget accounting and reporting. Fulfilling the former need not imply the latter, and this
difference should be made transparent. The objective under the former is to characterize
the stance of current fiscal policy without implying any additional recognition of
liabilities that are on a par with outstanding explicit debt.
Hence, as a “budget measure,” the inclusion of accrued obligations in accounting for the
government’s financial condition would reflect the future implications of existing
policies. Under this assumption, if maintaining current policies would result in future
transfers based on past triggering events, those accruals should be included in measuring
the government’s total financial obligations under current laws. Similarly, events that
would trigger larger future government receipts under today’s policies would increase the
government’s total accrued assets.
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